Lumbard, Chief Judge, and Medina and Hays, Circuit Judges. Hays, Circuit Judge (concurring in part and dissenting in part).
Plaintiff, an American shareholder of Banff Oil Ltd., a Canadian corporation, brought this shareholder derivative action to recover under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and Rule 10b-5, 17 CFR § 240.10b-5 (1967), for damages to the corporation resulting from the sales, in Canada, of Banff treasury stock to defendants Aquitaine of Canada, Ltd., and Paribas Corporation. Plaintiff alleged that the defendant corporations and Banff's directors, who are the individual defendants in this action, conspired to defraud Banff by making Banff sell treasury shares at the market price which the defendants, who had inside information not yet disclosed to the public, knew did not represent the true value of the shares.
Defendants moved pursuant to Rules 12(c) and 56, Fed.R.Civ.P., for summary judgment, and under Rule 12(b) to dismiss the complaint on the ground that the Court lacked jurisdiction over the subject matter. Judge Cooper, refusing to permit plaintiff to carry out a program of discovery, entered judgment for defendants, holding that the Court lacked jurisdiction because the Securities and Exchange Act does not have extraterritorial application, and that plaintiff failed to state a cause of action under § 10(b) and Rule 10b-5. 268 F. Supp. 385 (SDNY 1967).
We find that the district court had subject matter jurisdiction but affirm the judgment below because, while plaintiff's complaint alleges a breach of fiduciary duty by Banff's directors in authorizing sales of treasury shares at too low a price, these allegations fail to state a cause of action under § 10(b) of the Exchange Act.
Banff is a Canadian corporation and conducts all of its operations within Canada. Its common stock is registered with the SEC and traded upon both the American Stock Exchange and the Toronto Stock Exchange. In February 1964, Aquitaine Company of Canada, Ltd., acquired control of Banff through a tender offer to Banff shareholders in the United States and Canada. Aquitaine is a wholly owned subsidiary of a French corporation, Societe National des Petroles d'Aquitaine, which in turn is a subsidiary of Enterprises for Research and Activities in Petroleum (ERAP), a French governmental oil agency.
In March 1964, Banff and Aquitaine entered into an agreement to conduct joint oil explorations. In October 1964, Banff entered into a "farmout agreement" with Socony Mobil under which Banff and Aquitaine would receive a 50% interest in 160,000 acres in the Rainbow Lake area of Alberta, Canada, in return for paying the total cost of drilling two exploratory wells. The Rainbow area is a desolate wilderness region over 100 miles from the nearest allweather road or railway. At least sixteen wells had previously been drilled in the general vicinity by six different oil companies, and all had been abandoned as failures. Because of the difficulty of conducting explorations in this region and the highly speculative prospects for success Socony Mobil was willing to give up a half interest merely for drilling two test wells.
Banff received a 5% interest and Aquitaine received a 45% interest, pursuant to their joint exploration agreement, with the drilling costs to be paid 10% by Banff and 90% by Aquitaine. On December 11, 1964 Banff's Board of Directors, the three Aquitaine representatives abstaining, voted to offer to sell 500,000 shares of Banff treasury stock to Aquitaine at the current market price allegedly for the purpose of financing Banff's share of the exploration expenses. On January 5, 1965, Aquitaine's president wrote to Banff that "our Chairman and Managing Director * * * has agreed to your * * * proposal." On January 26, Banff issued a press release announcing that Aquitaine "intended to purchase" 500,000 shares of common stock at the price of $1.35 per share, the closing price on the Toronto Stock Exchange on December 11, 1964. Actual delivery of the shares took place March 16, 1965.
Exploration in the Rainbow area commenced toward the end of 1964. On February 6, 1965, the test well flowed oil to the surface on a drillstem test. This information was released to the public on February 8. The well reached total depth on March 17, 1965, the day after delivery on the Aquitaine purchase. On March 18, Banff issued a press release indicating that the discovery well was completed and that no further information would be disclosed in the immediate future. A further release on April 20 explained that the company was taking advantage of the Alberta law permitting it to withold information on its discovery for one year to reduce competition from other companies in bidding on government oil lands in the discovery area. The release stated "The Board feels that this discovery is of great significance to the company but it is too early to have any idea of the areal extent."
After the discovery, further exploration activity was undertaken. In September 1965, a press release announced the formation of a company, in which Banff has a 3 1/3% interest and Aquitaine has a 30% interest, to build a pipeline into the area. To finance its activities, Banff's Board of Directors authorized negotiation of sales of treasury shares of common stock at $6.75 per share or more. Paribas Corporation -- a Delaware corporation doing business in New York and a wholly owned subsidiary of Banque de Paris et des Pays-Bas, a French banking institution -- negotiated a purchase of 270,000 shares of Banff Common at $7.30 per share, the current price on the Toronto Stock Exchange, on behalf of Banque de Paris et des Pays-Bas pour le Grand Duche de Luxembourg, another subsidiary of Banque de Paris. The issue was to be placed with "ten European professional investors." A verbal offer was made by Paribas on November 19, 1965. A written offer was mailed by Paribas from New York and was accepted by Banff in Canada on November 22. Payment and delivery took place in Canada January 24, 1966.
The Allegations in the Complaint
The complaint alleged that "For some time prior to February 6, 1965, Aquitaine and the other defendants knew Banff had exceptionally valuable oil properties located in the Rainbow Lake area in Alberta, Canada." It alleged that the Aquitaine purchase of 500,000 treasury shares at $1.35 per share took place March 15, 1965, and that the Paribas purchase of 270,000 shares at $7.30 on January 24, 1966 was on behalf of "affiliates, business associates and friends" of Aquitaine and its parent companies, and that defendants withheld information until March 16, 1966 in order to purchase the treasury shares at an artificially low market price, paying to Banff about $10,000,000 less than the stock's fair market value.*fn1
The individual defendants are all of Banff's directors. They allegedly conspired with the corporate defendants and approved of, participated in or acquiesced in the transactions with the corporate defendants.
Subject Matter Jurisdiction
Plaintiff predicated subject matter jurisdiction upon Section 27 of the Securities and Exchange Act, 15 U.S.C. § 78aa, which gives the district courts exclusive jurisdiction over all "actions at law brought to enforce any liability or duty created by this title or the rules and regulations thereunder." The district court concluded that the Act has no extraterritorial application, and that therefore no liability arose under the Act with regard to the sales in question, which took place in Canada between foreign buyers and sellers. The court found nothing to rebut the presumption that the Act was intended to apply only to transactions within the territorial limits of the United States. It also stated that the presumption was reinforced by the "specific mandate" of Section 30(b), 15 U.S.C. § 78dd(b), which provides that the Act does not apply "to any person insofar as he transacts a business in securities without the jurisdiction of the United States. * * *"
We disagree with the district court's conclusion. We believe that Congress intended the Exchange Act to have extraterritorial application in order to protect domestic investors who have purchased foreign securities on American exchanges and to protect the domestic securities market from the effects of improper foreign transactions in American securities. In our view, neither the usual presumption against extraterritorial application of legislation nor the specific language of Section 30(b) show Congressional intent to preclude application of the Exchange Act to transactions regarding stocks traded in the United States which are effected outside the United States, when extraterritorial application of the Act is necessary to protect American investors.
Section 2 of the Exchange Act, 15 U.S.C. § 78b, states that because transactions in securities are affected with "a national public interest" it is "necessary to provide for regulation and control of such transactions and of practices and matters related thereto, * * * necessary to make such regulation and control reasonably * * * complete state commerce and to insure the maintenance of fair and honest markets in such transactions."
The Act seeks to regulate the stock exchanges and the relationships of the investing public to corporations which invite public investment by listing on such exchanges. H.R.Rep. No. 1383, 73rd Cong., 2d Sess. (1934), reprinted in 78 Cong.Rec. 7702 (1934). See also statements of Rep.Lea, 78 Cong.Rec. 7861 and Rep.Mapes, 78 Cong.Rec. 7922.
Banff common stock is registered and traded on the American Stock Exchange. To protect United States shareholders of Banff common stock, Banff is required to comply with the provisions of the Securities Exchange Act concerning financial reports to the SEC, § 13, 15 U.S.C. § 78m; proxy solicitation, § 14, 15 U.S.C. § 78n, and reports of insider holdings, § 16, 15 U.S.C. § 78p. Similarly, the anti-fraud provision of § 10(b), which enables the Commission to prescribe rules "necessary or appropriate in the public interest or for the protection of investors" reaches beyond the territorial limits of the United States and applies when a violation of the Rules is injurious to United States investors. "Acts done outside a jurisdiction, but intended to produce and producing detrimental effects within it, justify a state in punishing the cause of the harm as if [the actor] had been present at the [time of the detrimental] effect, if the state should succeed in getting him within its power." Strassheim v. Daily, 221 U.S. 280, 285, 31 S. Ct. 558, 560, 55 L. Ed. 735 (1911).
The Commission has recognized the broad extraterritorial applicability of the Act and has specifically exempted certain foreign issuers from the operation of Sections 14 and 16 of the Act, when enforcement would be impractical. Rule 3a12-3, 17 CFR 240, 3a12-3 (1967). The Commission has applied Section 15(a), 15 U.S.C. § 78 o, to foreign brokerdealers who transact business through use of the mails. See Rule 17a-7, 17 CFR § 240.17a (1967); 2 Loss, Securities Regulation, 1292 n. 15 (2d ed. 1961). Although it has the power to grant exemptions from rules under § 10(b), see Rules 10b-6(d), ...